Read the case study ‘Laurentian Bakeries’ and answer the following questions:
- What are the key items to keep in mind when determining the free cash flows for investment analysis?
- Calculate the weighted average cost of capital (WACC) for Laurentian Bakeries. How does the capital structure of a firm/project affect the WACC?
- Produce a projected capital budgeting free cash flow statement for the expansion of the company’s frozen pizza plant in Winnipeg. You can make the following assumptions: the project will have a life of 10 years, the corporate tax rate will stay at 38.5% per annum throughout the life of the project, inflation rate will be 4% per annum and there will be no salvage value at the end of the life of the project. Using your free cash flow statement, calculate the NPV, Payback, and IRR of the project.
- Without making any calculations, identify and discuss the benefits and risks of making the investment (i.e. expansion of the frozen pizza plant).
- As Danielle Knowles, what recommendation would you make concerning the Winnipeg plant expansion, and why?